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Economic Report: U.S. consumer spending climbs sharply in June, but mostly because of high inflation

The numbers:  Consumer spending, the main engine of the U.S. economy, jumped 1% in June, but the big increase largely reflected higher prices that Americans are paying due to rising inflation.

Economists polled by The Wall Street Journal had forecast a 0.9% increase.

Spending rose by a scant 0.1% last month after adjusting for inflation, the government said. Basically, consumers paid higher prices instead of buying more goods and services.

Consumer spending drives as much as 70% of U.S. economic activity. While spending has waned this year, Americans are still spending just enough to keep the economy out of recession.

How long that can go on in the face of high inflation and rising interest rates is very much in doubt, though.

Incomes rose 0.6% in the month and they are up sharply over the past year, but not enough to keep up with inflation. Households are falling behind financially.

Big picture:  The economy has slowed sharply in 2022 and even raised questions about whether the U.S. has already fallen into recession.

Gross domestic product, the official scorecard of sorts for the economy, has shrunk two quarters in a row for the first time since the pandemic.

Hardly any economist thinks a recession is already underway, but many predict a downturn is likely in the next six to nine months unless inflation comes down rapidly — a bet few are willing to make.

Key details: Americans spent more on gasoline, housing, health care and utilities in June, but that’s not good for consumers or the economy.

There is some good news ahead, though. Gas prices fell sharply in July to give Americans some relief and put a little extra cash in their pocket. Prices are still much higher compared to a year ago, however.

The savings rate, meanwhile, fell to a 13-year low of 5.1% in June from 5.5%. Families appear to be slowly drawing down their savings to cope with higher prices.

One caveat: The government’s ability to measure savings has been disrupted by the pandemic and has been prone to sharp revisions.

The rate of inflation as measured by the so-called PCE index rose 6.8% in the 12 months ended in June. The better known consumer price index has climbed 9.1% in same span to mark the highest level since 1981.

As a result, inflation-adjusted disposable income has shrunk 3.2% in the past year.

Looking ahead: “The tug of war on consumer purse strings is slowly being won by the bad guys: high inflation, rising borrowing costs, and dismal confidence,” said senior economist Sal Guatieri of BMO Capital Markets. 

Market reaction: The Dow Jones Industrial Average

and S&P 500

were set to open higher in Friday trades.

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